Small and medium sized firms (those with fewer than 500 employees) make up more than 99 percent of all employer firms. These firms face a myriad of challenges, not the least of which is regulatory compliance.

Every business owner wants his or her enterprise to grow. But as businesses grow, the need to add employees adds an even greater regulatory burden: human resources compliance.

While focusing on the core business, as they should be, owners also need to be aware that HR compliance shortcomings can put a small to mid-sized business at a huge competitive and financial disadvantage. While most feel that they don’t have the funds or resources to adequately address many HR compliance concerns, the consequences of ignoring them or making mistakes can be disastrous.

Some of the most daunting HR compliance challenges for small and mid-sized businesses include:

1. Documentation of HR issues

Lack of uniformity and centralized storage of personnel records can have serious consequences. Just some of the documents and records that require uniform treatment and appropriate storage include: employee benefits forms, time records, disciplinary reports, achievement records, policies and procedures, time off records, new hire forms, and training documents.

In businesses short staffed in HR, these forms are often handled manually, day-in and day-out, and mistakes are commonplace. If employees find errors or sense disorganization, they can become frustrated and may focus more on mistakes or glitches than on the actual benefits they are receiving. Negative talk and attitudes can spread rapidly among the workforce, creating a negative environment and worsening your HR issues.

2. Compliance with benefits regulations

The cost of complying with the overwhelming amount of benefits regulations is burdensome, especially for small and mid-sized businesses – even more so now that provisions of health care reform are beginning to take effect. And as your workforce grows, so does the risk you face as adding benefits for each employee increases the complexity of the regulation you face.

Larger businesses can more easily absorb the costs of HR compliance efforts, but each individual new employee costs small and mid-sized business a significant amount of money. According to an SBA survey, small businesses can spend up to 80 percent more per employee on federal regulatory compliance than larger companies do.

3. Litigation related to HR compliance

The greatest risk of failed HR compliance is the potential for litigation. Some of the most expensive litigation a company can face stems from companies either not realizing or ignoring regulations regarding discrimination and harassment.

According to the EEOC, less than 23 percent of small businesses provide training on racial or sexual discrimination or harassment. Wrongful termination suits are another potential danger when there is employee turnover. The cost of employment lawsuits is on the rise, with the average compensatory reward in federal employment cases now exceeding $490,000. (And that doesn’t include legal fees.)

4. Inconsistent HR policies

The size of a company dictates who handles the HR function, but as businesses grow and the workforce expands, the HR function becomes increasingly complicated, and increasingly critical. Companies need well-written policies and procedures manuals and employee handbooks, as well as a coordinated HR focus that includes payroll, benefits, training, and employee communications.

Being aware of compliance management issues – and addressing them – is an imperative. HNI can help you with HR compliance needs, including sample policies, documentation guidelines, and an on-call HR support.